Here’s what I’ve been reading for the past three months:

• The Art of Worldly Wisdom — Baltsar Gracian was a Spanish priest and philospher in the early 1600s who understood human nature better than most. His Worldy Wisdom offers 300 maxims on fame, fortune, luck, reputation, wisdom, and more. It can be read in bite-sized pieces. (Notes)
• The Lords of Creation — Tells the history of business and finance from the late 1800s to the depths of the Great Depression. You get stories like the creation of U.S. Steel, the fight over the Union Pacific, and the attempt to corner United Copper. It’s a history of power, greed, concentrated wealth, willful irresponsibility, and financial crises. Notes to come.
• The Usefulness of Useless Knowledge – The book contains Abraham Flexner’s timeless essay of the same name and an introduction to the piece. Flexner warns of attempts to control and mold science rather than going wherever curiosity leads. Many discoveries and inventions are the byproduct of what Flexner called “useless knowledge” gained from chasing curiosity. It’s a timely piece. Flexner’s essay can also be found via Google.
• Innumeracy: Mathematical Illiteracy and Its Consequences — A fun little book for anyone who likes numbers, or is curious about stories with numbers, and why we are horrible at comprehending big numbers, small numbers, fractions, probabilities, and more. The consequences: we misjudge risk, believe claims easily refuted, and just make poor decisions. It’s similar to Darrell Huffs, How to Lie with Statistics. Notes to come.

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Quote for the Week

Graham was concerned with limiting his risk and he didn’t want to lose money. People don’t remember what happened before and how things were. And that’s one of the mistakes people make in investing as well.

In the last 15 years, it’s been a remarkable stock market. But people forget what things were like during the 1930s. I think Graham – because he lived through that period – remembered it, was scared it would happen again and did everything he could to avoid it.

But in the process of avoiding it, he missed a lot of opportunities. That’s one of the problems you always have — you don’t really lose, but you don’t really make, either. I believe you should remember what took place — even if you weren’t around at the time. One of the problems of a lot of the people who went through the Depression — Ben Graham, Jerry Newman and others — is that they keep on thinking that things will always be like that.

Even Graham used to say — and quite correctly — that you can’t run your investments as if a repeat of 1932 is around the corner. We can have a recession and things can get bad. But you can’t plan on that happening. People who did missed this tremendous market. — Walter Schloss (source)

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Electricity was a fledging industry in the 1890s. Samuel Insull was at the center of its transformation and growth.

Samuel Insull got his start as a stenographer in London. After losing his job, he found an opening at Thomas Edison’s new telephone company, applied, and was hired as the bookkeeper and secretary for the London manager.

As fate would have it, a job opening in America changed everything. Edison needed a personal secretary. Insull made his interest known. At age 21 (1881), he was off to the U.S. to work alongside the great inventor. Edison recognized Insull’s potential and he quickly moved up the ranks.

Within 11 years, he was offered a vice-president position in Edison’s General Electric Company. Insull, unhappy with the offer (he expected a higher position), took charge of Chicago Edison Company instead in 1892.

Insull believed that mass production and scale was the future of the electric utility industry. The efficiencies that came with size lowered costs, lowered rates for customers, and boosted profits for shareholders. It was a win-win all around. But that meant Insull needed to monopolize Chicago’s electric grid.

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Quote for the Week

People spend all this time trying to figure out “What time of the year should I make an investment? When should I invest?” And it’s such a waste of time. It’s so futile. I did a great study, it’s an amazing exercise. In the 30 years, 1965 to 1995, if you had invested a thousand dollars, you had incredible good luck, you invested at the low of the year, you picked the low day of the year, you put your thousand dollars in, your return would have been 11.7 compounded. Now some poor unlucky soul, the Jackie Gleason of the world, put in the high of the year. He or she picked the high of the year, put their thousand dollars in at the peak every single time, miserable record, 30 years in a row, picked the high of the year. Their return was 10.6. That’s the only difference between the high of the year and the low of the year. Some other person put in the first day of the year, their return was 11.0. I mean the odds of that are very little, but people spend an unbelievable amount of mental energy trying to pick what the market’s going to do, what time of the year to buy it. It’s just not worth it…

They should buy, hold, and when the market goes down, add to it. Every time the market goes down 10 percent, you add to it, you’d be much — you would have better return than the average of 11 percent, if you believe in it, if it’s money you’re not worried about. — Peter Lynch (source)

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For most of us, the key to playing any sport well is to simplify the game, play within our abilities, and keep errors to a minimum. The same is true for long-term investing.

Golf is an apt comparison as relayed by Charley Ellis with the help of Tommy Armour:

Armour summarizes his years as a competitor, teacher, and student of the Great Game with a simple fact that undoubtedly will improve your scoring. “It is not solely the capacity to make great shots that makes champions, but the essential quality of making very few bad shots.” When Bob Hagin popularized “torpedo” stocks, he was making the same point. Imagine how investment performance could be improved by deleting any fund’s three or four worst stocks.

Like all great teachers, Armour repeats himself: “The way to win is by making fewer bad shots.”…

Armour goes on to explain his meaning with somewhat different words: “Play the shot you’ve got the greatest chance of playing well, and play the shot that makes the next shot easy.” Armour might change this advice a bit for investors to: Make the investment decision today that makes holding on for the long term easy.

Of course, improving performance goes beyond just removing a handful of bad performing stocks. Reducing emotional and biased decisions helps too. Maybe more so when it comes to holding on the long term.

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Quote for the Week

Many aspects of investing are fun, but your future wealth isn’t a game. You should manage it in the most cold-blooded fashion. Emotion, pride, ego, dreams, and nightmares have nothing to do with the process, although some investors rely on little else. It is in this sense that volatility really matters.

Many people pride themselves on being “long-term investors,” but acting deliberately when prices are bouncing around is not so easy. When stocks are blasting skyward, even the most steadfast can be sucked into the updraft. When they are cascading downward, keeping one’s cool is almost impossible. Volatility provokes the constant dread that some investors know more than we do, making us fearful of ignoring such powerful price movements…

I emphasize this psychological aspect of the matter, because those wonderful statistics on long-term returns are what the market did, not what any single individual or fund did, or would do, if history replayed itself. In my real-world experience, investors with smaller allocations to stocks and with some anchors to windward have been the ones most likely to be the winners over the long haul. The crucial element of success is the ability to make decisions without freezing up or slamming the panic button. In bear markets, the muted volatility and the contractual safety of bonds provide the most congenial environment for arriving at rational decisions about stocks. In bull markets, the balanced portfolio may not make for lively cocktail-party conversation, but with 60 percent in stocks, your wealth will still be participating and growing…

In investing, tortoises tend to win far more often than hares over the turns of the market cycle (and, as we have recently been reminded, markets still do have cycles). — Peter Bernstein (source)

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